Average costs can be determined by dividing the firm's costs by the quantity of output it produces.
The average cost is the cost of each typical unit of product.
Average Costs
Average Fixed Costs (AFC)
Average Variable Costs (AVC)
Average Total Costs (ATC)
ATC = AFC + AVC
Average and Marginal Costs
AFC= Fixed cost Quantity (FC) ÷ Quantity (Q)
AVC= Variable cost Quantity (VC) ÷ Quantity (Q)
ATC= Total cost (TC) ÷ Quantity (Q)
MC = (change in total cost) ∆TC ÷ (change in quantity) ∆Q
Cost Curves and Their Shapes
Marginal cost rises with the amount of output produced. This reflects the property of diminishing marginal product.
The average total-cost curve is U-shaped.
At very low levels of output average total cost is high because fixed cost is spread over only a few units.
Average total cost declines as output increases.
Average total cost starts rising because average variable cost rises substantially.
Relationship between Marginal Cost and Average Total Cost The marginal-cost curve crosses the average-total-cost curve at the efficient scale.
Efficient scale is the quantity that minimises average total cost.
Typical Cost Curves
Three Important Properties of Cost Curves
Marginal cost eventually rises with the quantity of output.
The average-total-cost curve is U-shaped.
The marginal-cost curve crosses the average-total-cost curve at the minimum of average total cost.
COSTS IN THE SHORT RUN AND IN THE LONG RUN
For many firms, the division of total costs between fixed and variable costs depends on the time horizon being considered.
In the short run, some costs are fixed. In the long run, all fixed costs become variable costs.
Because many costs are fixed in the short run but variable in the long run, a firm's long-run cost curves differ from its short-run cost curves.
Economies and Diseconomies of Scale
Economies of scale refer to the property whereby long-run average total cost falls as the quantity of output increases.
Diseconomies of scale refer to the property whereby long-run average total cost rises as the quantity of output increases. Constant returns to scale refers to the property whereby long- run average total cost stays the same as the quantity of output increases.